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Jaipuria Institute of Management, Noida

SAURABH’S DILEMMA: ACCOUNTANT VERSUS ECONOMIST


PERSPECTIVE

CASE

This case was written by Vranda Jain (Jaipuria Institute of Management, Noida). It is intended to
be used as the basis for class discussion rather than to illustrate either effective or ineffective
handling of a management situation. The case was compiled from generalised experience.

© 2016, Jaipuria Institute of Management, Noida.

No part of this publication may be copied, stored, transmitted, reproduced or distributed in any
form or medium whatsoever without the permission of the copyright owner.
SAURABH’S DILEMMA: ACCOUNTANT VERSUS ECONOMIST
PERSPECTIVE

Key Words: Managerial decision making, Opportunity Cost, Economic Profit, Value of
the firm.

Saurabh, a finance proficient, is working for a Multi-National company as an Assistant


Director, Tax Advisory Services (TAS). He has an experience of 13 years in the Audit
and Tax Division. Over the years, he has been happy with his career growth and
progression. But the inherent desire to pursue his business venture has been getting
stronger over these years. He was keen in starting his own kindergarten school.

 He is currently working as Assistant Director, TAS, in a reputed big 4 Audit


Firm. Here he is drawing an annual salary of Rs. 18 lakhs. He is contemplating
quitting his job and opening the school.
 He is planning to take a Franchisee of a leading playschool in Delhi-NCR. When
he contacted the Corporate Office of the play school, he was told that the
franchisee cost would be Rs. 2,50,000 for a period of 5 years. On the completion
of this tenure, the entire agreement would have to be revised or may even be
discontinued, depending upon the decision of the management of the Head
Office. The school management was flexible enough that the franchisee cost
could be paid on an annual basis. On the basis of their past experience, they
shared with Saurabh that he could expect to earn a rate of return of about 12 per-
cent per year.
 The Marketing team at the Corporate Office of the school shared their estimate
regarding the number of admissions with Saurabh. On the basis of their estimate,
admission in this year would be 30, 45 and 60 with probabilities of 0.2, 0.4 and
0.5 respectively. The one time admission fee (annual) for the students would be
Rs.10,000 and the Quarterly fees (including miscellaneous) would be Rs. 12,000.
Saurabh would have exclusive control over this amount.
 The School would be set up in an apartment located in a Residential society in
Delhi- NCR. The school premise (carpet area 2000 sq feet) could be easily rented
out at a lease (for 12 months) of Rs. 2,40,000. The Broker mediating between the
owner of the apartment and Saurabh would charge a commission of 1 month from
both the parties. Saurabh would also be responsible towards the payment of
monthly maintenance of the apartment to the Resident Welfare Association
(RWA) of the society at a rate of Rs. 2 per sq feet per month.
 The school management shared with Saurabh that they have a standard norm of 1
teacher and 1 helper/assistant per 15 students and this ratio has to be maintained.
While surveying the Job market, Saurabh came to know that the monthly salary
of the teacher would be Rs. 10,000 and that of helper would be Rs. 5000 per
month.
 The monthly electricity bill would average out to be Rs. 2500 per month and the
miscellaneous expenses (stationary, consumables, first aid etc) would total up to
Rs. 2000 per month.
 Saurabh is also considering investing his own capital of Rs. 4,00,000 towards
renovation and purchase of furniture and educational toys. The other alternative
to investing his funds would have been taking loan from the bank, which would
have attracted an interest rate of 6 per-cent per annum.

Saurabh’s Sister, a teaching professional in Economics, deliberated upon the situation


and made certain calculations. She told Saurabh that he should re consider and re-vise his
plan. The existing plan would not turn out to be fruitful. He would actually run the play
school as a net loss of Rs. 8,56,000 per annum if only 30 students enroll. This came as a
surprise to Saurabh. He argued:

 This is not possible. I plan to run the school for profit; and not for salary. I will
not draw any salary from the school earnings.
 I am investing my own hard earned money in the business. I am not taking a loan
from the bank. I am not paying any interest on my own money. I am indeed
happy that my business plan is free from any debt to bank or moneylender, for
that matter.
 I just don’t understand that when I am trying to save some money by providing
my own services and expertise; by investing my own capital, how can I incur net
losses?

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